Brokerages Pay Now, Win Later?
One of the major goals of U.S. regulators who struck a $1.4 billion settlement on Apr. 28 with 10 investment banks over their research has been to give angry investors enough ammunition in their lawsuits. Many investors aim to to recoup a huge amount of their stock-market losses from brokerages that misled them with overly rosy research reports during the tech bubble of the 1990s (see BW Online, 4/29/03, "The Settlement Is Just the Beginning"). But Mel Weiss, a founding senior partner of Milberg, Weiss, Bershad, Hynes & Lerach, believes the pact may not be as helpful as it seems at first glance.
Weiss has a lot at stake in the outcome. His law firm is synonymous with shareholder suits and has filed more than 100 cases against dozens of public companies and investment banks alleging initial-public-offering fraud and price manipulation. On numerous occasions, he has said he believes Wall Street conspired to manipulate the stock market in the way investment banks handled IPOs and other hot stock issues.
On Apr. 28, Weiss talked by telephone with BusinessWeek Investment-Banking Editor Emily Thornton and explained why he has mixed feelings about the deal. Here are edited excerpts of their conversation:
Q: What do you think of the settlement? A:
Q: What do you think of the settlement?
A:I'm worried that banks will try to use this as an argument that prior to this so-called new rule separating analysts from investment bankers, there was no rule. So they didn't violate anything. And they're going to try to wriggle out of civil liability for the victims with that argument. Politicians are pounding their chests and saying that we'll have major reforms.
But it was always the case that investment banking and research were supposed to be separate. If anybody in the regulatory system or in the hierarchy of these companies was aware that there was a breakdown between analysts and bankers and didn't do something about it, they should be hung.
Q: You're working on a case alleging that 55 investment-banking firms and 309 companies manipulated the high-tech IPO markets. Could this hurt your case? A:
Q: You're working on a case alleging that 55 investment-banking firms and 309 companies manipulated the high-tech IPO markets. Could this hurt your case?
A:It could. The banks now have arguments they wouldn't have otherwise had. I would have preferred it if the government said this was always a violation, and now we'll enforce it. Our litigation really won't be benefited because there are no admissions of fraud in these settlements. The amounts of money they got for the victims are very small in relation to what we're seeking.
Q: What about the documents that regulators are releasing as part of the settlement? Is that one of the favorable things to come out of this? A:
Q: What about the documents that regulators are releasing as part of the settlement? Is that one of the favorable things to come out of this?
A:The documents will be helpful for people in arbitration proceedings because their lawyers don't have the ability to get those documents. Arbitration doesn't permit discovery. But our case is broader than anything that the government looked at. They're looking at 10 companies. We're looking at 55 banks. It's good evidence. But it's not anything we would not have gotten.
The documents are helpful predominantly in cases brought by customers of brokerages in which it can be proven that their analysts misled the internal brokerage system and caused those brokers to recommend purchases to their customers. But whether somebody in the open market who's not a customer of that bank can also sue will be a much tougher case.
Q: It doesn't sound like you think this settlement will fix Wall Street's research practices. A:
Q: It doesn't sound like you think this settlement will fix Wall Street's research practices.
A:To make it appear that now we'll have a system that will insist upon separation between investment banking and research misstates what I think has been the history of the industry. There was a wall between those two functions. But there was a total breakdown in that wall. It's not as if the rule wasn't there. It just wasn't enforced.
Edited by Beth Belton
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